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Sales tax on restaurants through Finance Act

The imposition of 7.5% sales tax on restaurants through the Finance Act 2019 by the National Assembly, energetically defended by the Chairman of Federal Board of Revenue (FBR), is patently unconstitutional being in violation of Article 142 of the Constitution of Islamic Republic of Pakistan [“the Constitution”]. It is also the worst manifestation of federal fiscal highhandedness. After Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment], the federal government cannot levy sales tax on services. This right exclusively vests with provinces under Entry 49, Part I of the Fourth Schedule to the Constitution which says: “Taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services”.

It is an established law that entries contained in the Constitution are mutually exclusive—Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.)]. It is highly lamentable that the coalition Government of Pakistan Tehreek-i-Insaf (PTI) in its very first budget blatantly violated the supreme law of the land, and till today no province has approached the Supreme Court of Pakistan under Article 184 of the Constitution of Pakistan.

The Sindh High Court in the Pakistan International Freight Forwarding Association v Province of Sindh & Another [(2016) 114 TAX 413 (H.C. Kar.) categorically held:

“It is declared that on account of the 18th Amendment to the Constitution (which took effect from 19.10.2010) the Provinces alone have the legislative power to levy a tax on the rendering or providing of services, but this is subject to Article 270AA(7) of the Constitution (as substituted by the said Amendment), and by reason thereof the legislative competence has manifested in the Province of Sindh from 01.07.2011 onwards, the date on which the Sindh Sales Tax on Services Act, 2011 came into force”.

The above judgement considered the following important constitutional issues:

“Where lies the legislative competence to impose a fiscal levy (whether tax or duty) on the rendering or providing of services? Does it lie solely with the Federation, which presently levies a duty in terms of the relevant provisions of the Federal Excise Act, 2005 (“2005 Federal Act”)? Or does it vest only in the Provinces, where a tax is levied in terms of their respective statutes, being here the Sindh Sales Tax on Services Act, 2011 (“2011 Provincial Act”)? Or, as some have contended before us, does the taxing power vest simultaneously yet exclusively in both the Federation and the Provinces? Or (finally) is it that the taxing power is common and concurrent?”

The United Nations classifies ‘restaurant’ as service activity under International Standard Industrial Classification of all Economic Activities (ISIC). Since the adoption of the original version of ISIC in 1948, an overwhelming number of countries around the world have used ISIC as their national activity classification or have developed national classifications derived from ISIC. ISIC provides guidance to countries in developing national activity classifications and has become an important tool for comparing statistical data on economic activities at the international level. Needless to say that amendment made in Chapter 98 (services) of the Pakistan Customs Tariff, excluding restaurants from the list of services, by the National Assembly is unconstitutional.

The provinces must approach Supreme Court of Pakistan having exclusive jurisdiction in the matter under Article 184(1) & (2) that read as under:

184. Original jurisdiction of Supreme Court.-(1) The Supreme Court shall, to the exclusion of every other Court, have original jurisdiction in any dispute between any two or more Governments.

Explanation.-In this clause, “Governments” means the Federal Government and the Provincial Governments.

(2) In the exercise of the jurisdiction conferred on it by clause (1), the Supreme Court shall pronounce declaratory judgments only.

It is also time that taxation rights under the prevalent constitutional scheme are renegotiated between the Centre and provinces. There should be harmonised sales tax on goods and services. It would help to raise adequate resources for provinces and reduce gargantuan fiscal deficit at national level. In British India, sales tax on goods was a provincial subject. After independence, the Constituent Assembly took away this right in 1948 and none of the provinces has ever raised a voice to take it back. Sindh, Khyber Pakhtunkhwa and Balochistan are entitled to “net proceeds” on natural gas and electricity as envisaged in Article 161(1)(a) & (b) of the Constitution, but they never pressed for it—their present share in sales tax from divisible pool is as low as 24.5%, 14.6% and 9% respectively. The provinces have rich natural resources as well as wealth of oil, gas and electricity but due to low population get a small share for goods they produce/supply.

Provinces also need to be criticised for their dismal performance in collecting agricultural income tax/property tax from the rich and mighty. Like the Centre, they lack political will to collect due taxes from mighty sections of society. The meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and Centre in fiscal year 2018-19—is a case in point. It is, thus, imperative that right to levy tax on income, including agricultural income, should be given to the Centre. In return, the Centre should hand over sales tax on goods to the provinces.

(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)

Huzaima Bukhari and Dr Ikramul Haq, "Sales tax on restaurants through Finance Act," Business Recorder. 2019-11-08.
Keywords: Economics , Constitution of Pakistan , Finance Act 2019 , Tax on goods , Eighteenth Amendment , Sales tax , Fiscal levy , Fiscal deficit , Income Tax , Restaurants , FBR , PTI , ISIC